Tax considerations for Australian expatriates whilst overseas

A wise man once said, “east or west, home is best”. However, is it possible to feel at home away from home? For Australians planning to move abroad, there are several financial decisions that can be made to ensure they have the most beneficial stay overseas as possible by significantly reducing the burden of taxation.

Future expats should try to plan as much as possible ahead of the move, to ensure they can benefit from tax advantages as soon as they move overseas. Australia has entered into treaties with 40 countries which ensures that an expat is only treated as a tax resident in one of the countries, thereby eliminating the risk of an expat being subjected to double taxation.

There has been a lot of confusion for expats about how to determine whether one is a resident or a non-resident for tax purposes. Fortunately, a recent ruling has provided insight into this question. The court allowed an appeal by an expat that upheld that the plaintiff had demonstrated his intention to remain in the overseas country. This was done by taking into consideration significant choices that the plaintiff had made while overseas, other than the mere question of whether he had a permanent residence overseas. Such other factors considered in the ruling include the decision to relocate one’s family abroad, enrolling children in schools and making significant investment decisions overseas. He was therefore treated as non-resident for tax purposes.

This is a win for Australians going overseas who hope to escape the burden of taxation in Australia by ensuring that ATO takes a closer look when determining whether the expat has demonstrated their intention to live in an overseas country permanently and should, therefore, be treated as a non-resident for tax purposes. It also provided a platform for the Australian Government to review its rules on Australian residency to provide more clarity.

Below we look at some tax considerations Australian expats should be aware of…

Capital gains tax

Most assets other than real estate assets are considered to be sold on the date an Australian who intends to become a non-resident departs the country. Real estate assets, however, are still subjected to capital gain tax even after the date of departure and should be paid on the actual date of the sale.

The implied sale of assets upon departure of an expat from Australia creates a tax liability which may not be planned for. A waiver can, however, be applied by deferring the capital gains tax to a future date or actual date of the sale.

This depends on which option attracts a lower capital gains tax liability. Additionally, the investment earnings become exempt from capital gains tax whilst overseas provided that tax due up to the date when the residence changed address has been paid. Therefore, a tax benefit exists if the deferred capital gain from the deemed sale on departure is small as the earnings accruing in future will not be subject to taxation for the non-resident.

Superannuation

Superannuation is the regular contribution made into a fund by an employee towards securing a future pension. The good news is that a non-resident can continue making these contributions to superannuation funds in Australia and the rules of eligibility apply to both residents and non-residents. Non-residents are however discouraged from making such contributions to a self-regulated fund without contacting a professional.

It would be prudent for an expat to continue remitting these contributions to an Australian superannuation fund if they plan to retire in Australia or if the Australian tax policy on superannuation is more attractive than one overseas. If the tax policy in the overseas country, however, is more favourable, it would be tax-efficient to continue making these contributions to a local pension fund overseas which can be withdrawn and transferred to Australia upon return.

Renting vs. mortgage

This decision between renting or applying for a mortgage overseas is dependent on the tax implications arising from both choices. On one hand, costs in relation to rental income are tax-deductible. For example, interest and depreciation allowances attract no tax liability on rental income. On the other hand, capital gain taxes from the sale of the property attract a tax liability immediately on the date of sale.

Australians living overseas have the option to borrow up to 90% of the property value. Some lenders also use the tax rate applicable in their country as opposed to the Australian tax rate which improves the borrowing power of the expatriate.

It is important to consider other factors that may have a negative impact before making this decision. This includes foreign currency fluctuations, a foreign spouse’s income may not be considered in an application and some lenders could apply Australian taxes thereby limiting one’s borrowing ability.

The above are financial decisions to consider and plan ahead of departing Australia. It may take a while for tax expatriates to adjust to a new lifestyle and a higher disposable income.

Once this period is over, one can consider the following savings and investment decisions whilst overseas. These decisions will help reduce the burden of taxation by offsetting against tax to be levied.

Reducing debt on personal and property loans

Clearing private debt such as credit card debt and personal loans should be a priority for an expatriate as this debt has no tax benefit and often attracts higher interest rates. It is advisable to maintain debt on family loans or any other income-generating property as these hold significant tax benefits as opposed to reducing debt. Reducing debt is only recommended in the instance one has a property loan whose rental income may not be realised in the foreseeable future.

Forced savings and negative gearing on Australian property

Another great tax planning tool while overseas is to force savings. Even at a high level of borrowing, say 60-80%, one can still enjoy maximum tax advantages overseas and it is a wise way to have forced savings. For this concept to apply, the interest cost charged on the loan should be sufficient enough to have a property make an annual taxable loss. This will be achieved by ensuring that the expenses incurred from running it exceed the rental income expected. This concept is called negative gearing.

However, while overseas this loss cannot be used to offset against other income taxes other than annual property income or property capital gains. Upon return to Australia, the loss accumulated over the years can be used to offset salary, investment income or retirement income, therefore, providing a significant buffer against tax implications for many years. This benefit will also be realised on a further incremental property by allowing for depreciation and construction costs to be tax-deductible thereby reducing the tax due from such property.

These long-term tax benefits accruing from Australian property should be given due consideration as they form an important factor in every financial planning decision for an expatriate whilst overseas.

Investing in Australian shares

Acquiring Australian shares while overseas is another very effective saving strategy. Choosing which shares to invest in can be a tough decision to make. However, with the appropriate advice, acquiring Australian shares is an excellent option to save. This is because most trading shares acquired while overseas are not subjected to tax and therefore dividends earned do not attract any capital gains tax. If the company has not paid any tax, a withholding tax of 15% will be applied. Upon return to Australia, the shares invested in will be subjected to tax, but only the amount in excess of the market value on the date of return of Australia. In summary, all profits accumulated over time while overseas are free of Australian tax.

Investing in other non-Australian shares and trusts

The same rule that applies to an Australian expat investing whilst overseas also applies to non-Australian shares. Tax only begins to accrue on gains from the excess of the market value on return to Australia. There are special rules that apply to a selected group of investments held in non-public trusts where such capital gains are taxable each year annually on an accrual basis. This can be a complex area where expert advice is needed to be applied on a select case to case basis just to be certain on the tax implications arising.

This also applies to other assets purchased while overseas such as property or antiques that become taxable only upon an expat’s return to Australia as a tax resident. Similarly, these capital gains will only be taxed if the amount to be paid is in excess of the market value on the return date. To protect the value of the property, which is very important to do, the expatriate should obtain a sworn affidavit determining the market value of the said property in order to avoid any problems in future that may arise while trying to establish the market value.

Australian expats can, therefore, have peace of mind knowing that their savings and investments made whilst overseas will yield maximum tax benefits whether they intend to settle overseas or return to Australia. These benefits coupled with the increase in disposable income will ensure that any Australian expat will enjoy their stay overseas. Should they decide to return to Australia at any given time in their life, they will still reap the benefits from the decisions made whilst overseas.

Shane's an Australian Chartered Accountant and Australian expat tax specialist who's also an expat himself (based in Asia). Shane's passionate about tax and legitimate tax minimisation, tax-planning and structuring, particularly as it relates to Australian expats who are often subject to high rates of tax back home in Australia.